Shaw Capital Management Headlines: Korean Finance Firms Stumble Overseas

Baton Rouge, Louisiana (PressExposure) March 21, 2011 --

By Jung Jae-yoon []

Korean banks operating in New York City have a noticeable lack of customers. Domestic banks operating in other countries have mostly failed to localize their businesses. By the Korea JoongAng Daily

While it is common to find a man in New York driving a Hyundai or a woman in London talking on her Samsung cell phone, it is a much harder task to find someone overseas employing the services of a Korean financial company.

And even if foreigners are aware of a particular Korean financial firm that operates in their country, chances are they have never visited it.

"Compared to our manufacturing industry that has already advanced onto the global stage, the domestic financial sector is far behind. The real definition of 'localization' is not just the establishment of a subsidiary overseas, but is the sale of [Korean] financial products to local investors," said Lee Kyung-young, chief executive officer of Mirae Asset Securities in Hong Kong.

"Samsung Electronics and LG Electronics have been dominating the world market," Lee added, noting that the financial industry has huge growth potential in overseas markets, but Korean companies have stumbled in trying to tap that potential.

And while it is full steam ahead for electronics exports - Korea had leaped to the seventh largest exporting country in the world as of the first half of this year - domestic financial firms have barely made a ripple in most overseas markets.

According to the Financial Supervisory Service, all of Korea's finance firms operated just 319 branches and subsidiaries in 34 countries as of June, which is an insignificant number when compared to the overall size of Korea's economy.

Almost 80 percent of the branches are in just eight countries. China is home to the most number of Korean financial firms with 57, followed by the United States with 49. That is followed by Vietnam, which has 38 Korean firms, Hong Kong with 38, Japan with 25, the United Kingdom with 22, Singapore with 14 and Indonesia with nine.

Consequently, Asia accounts for 60 percent of domestic financial firms' global coverage. About a decade ago, Korean finance companies led the charge into the U.S. market, but after mediocre results, they have turned to more familiar markets in Asia. For example, over the past decade, the number of branches and subsidiaries of domestic banks, securities firms, insurers, asset management firms and loan companies grew in China from 24 in 1999 to 57 this year.

As Asia's economic importance grows, more and more Western financial firms are exploiting economic gains in emerging countries. The U.K.-based financial firm Standard Chartered is the poster boy for financial companies operating outside of their own country. In the case of SC Group, its management has put a tremendous amount of its focus on Asia and 90 percent of total sales are being generated outside the U.K.

Korean firms' biggest shortfall, say experts, is a lack of strategic planning when aggressively entering emerging countries.

In fact, domestic financial firms' overseas subsidiaries and branches have not turned in encouraging results when it comes to profit generation and localization.

Exemplifying their general failure, even Korean manufacturing firms use foreign banks when doing business abroad. "Korean banks couldn't even afford to stand [on their own] when the country won a nuclear power plant deal from the United Arab Emirates," Euh Yoon-dae, chairman of KB Financial Group, pointed out during his inaugural speech in July this year.

Most Korean banking leaders agree that local financial firms' advancement overseas would be a boon for Korean exporters looking to make inroads abroad.

"The domestic manufacturing industry will see a boost once [Korean finance firms] advance overseas," said Park Hyeon-joo, chairman and founder of Mirae Asset Financial Group, at the Emerging Markets Expert Forum 2010 on Nov. 3. "If domestic financial companies are not being aggressive enough about overseas investments with domestic capital, local manufacturers will eventually lose their competitiveness due to a rise in the value of the [Korean] currency."

Park claimed that more domestic capital should be invested in overseas markets to mitigate the rising won. He also said the latest round of quantitative easing in the U.S. will direct foreign capital into emerging markets, which in the short-term will be another factor driving up the value of the won.

"Beyond an investment banking management strategy, financial firms should advance into overseas markets and increase their international asset holdings to find stability in the foreign exchange market," explained Kim Hyong-tae, the president of Korea Capital Market Institute.

Most industry experts said that for Korean financial firms to develop into global banking giants, they need to improve their investment banking businesses.

"Domestic financial companies should focus more on improving the operation of their investment banking businesses in the Asian market, rather than thoughtlessly advancing into [international] markets," said an official employed in the local financial industry, adding that there is a need to recruit professional talent and form strategic partnerships with investment banks globally.

Korea lacks large financial firms with strong global capabilities, also known as systemically important financial institutions, or SIFIs. A financial reform measure discussed at the G-20 Summit in Seoul last week would regulate SIFIs, but a high-ranking official at the Financial Services Commission said that no domestic financial firms are big enough to be affected by any new regulations, which he characterized as both good and regretful.

Another strategy, other than nurturing the investment banking sector, is to pursue mergers and acquisitions with foreign financial companies. An industry expert explained that financial companies should carefully mull over M&A plans, especially considering the importance of localization.

Through strategic M&As, Korean financial firms would be able to recruit local talent who are familiar with their financial investment environment.

In the wake of the global financial crisis, Korean banks' aggressive drive into overseas markets have been stalled for the time being. However, as the global economy enters a recovery phase, local banks are resuming their overseas expansion.

During the G-20 Summit, chief executives of domestic banking giants met with CEOs of foreign financial firms to seek partners to advance abroad. Among them were KB Financial Group chairman Euh and Woori Financial Group chairman Lee Pal-seung.

After meetings with CEOs of foreign banks, an official at Woori Financial Group proudly said that "the biggest outcome was the establishment of networks that are needed to advance into Asian markets including India and China."

Hurdles to expansion

Korean finance firms face many restrictions in operating businesses in emerging countries.

"There are many hurdles, not only in promoting our brand, but there are also high barriers to entry - especially in developing countries such as China and Vietnam," said an official at Mirae Asset Securities, who requested for anonymity.

"Subsidiaries and branches trying to generate operating profits are failing because of a lack of global brand recognition and an absence of differentiated strategies," said Park Jae-heung, who is head of the FSS' Financial Hub Korea center.

"Competition among domestic financial firms in overseas markets can become fierce ... [and domestic] companies can face insolvency if the conditions in the country where they are operating businesses deteriorate," Park explained.

Suh Byeong-ho, researcher at the Korea Institute of Finance, said that regulations in Korea have been eased to encourage banks to advance into overseas markets, but because of that, side effects can occur such as deterioration of profitability.

In fact, a number of finance-related incidents have occurred at domestic banks' overseas branches this year.

Earlier this year, Korea Exchange Bank was slapped with an "institutional warning" from the Financial Supervisory Service after the bank's branches in Australia and Los Angeles, California were accused of embezzlement and were found to have violated foreign currency loan-limits. Both of its branches in Tokyo and Osaka violated the money laundering protection law.

While Korea's economic status was upgraded with the successful hosting of the G-20 Summit last week, experts said the onus is on the domestic financial sector to take advantage of international growth potential in overseas markets.

About Shaw Capital Management Headlines

The Shaw Group Inc. was founded in 1987 as a fabrication shop in Baton Rouge, La., by Chairman, President and Chief Executive Officer J.M. Bernhard Jr. and two colleagues. Driven by leaders with bold vision and a strong entrepreneurial spirit, the company has evolved into a diverse engineering, construction, technology, fabrication, environmental and industrial services organization with 27,000 employees in strategic locations around the world.

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Press Release Submitted On: March 21, 2011 at 2:39 am
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